Central Bank: Special Measures Needed to Minimize Financial Risk

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Central Bank: Special Measures Needed to Minimize Financial Risk

According to head of the Central Bank of Iceland, Már Guðmundsson, it is impossible to loosen the financial restrictions in place in Iceland without jeopardizing its economical and financial stability. The statement was made in the foreword of a recent publication of the Central Bank and emphasizes that some form of special measures must be introduced before making any changes to Iceland’s fiscal control, as reported recently on RÚV, the Icelandic National Broadcasting Service.

Már identifies the problem of introducing new fiscal measures as threefold. Firstly, during the next five years there will be a heavy repayment burden of foreign loans combined with a trend towards trade surplus. Secondly, private Icelandic financial actors have restricted access to credit markets, which, once their Resolution Committees have completed their work, could lead to a large amount of Icelandic króna in foreign establishments. Thirdly, the lack of an incoming flow of foreign currency creates hurdles to finding a way to get króna back into the Icelandic economy.

In general the Icelandic economy has shown improvement over the last few quarters. Economic growth is up due to increased export of goods and services. Purchasing power parity has gone up and homes are better able to manage their private debt. The banks are gaining ground but they are not as stable as they appear. Már does not consider this a reason for alarm, though. He points to the lack of access to international capital flow and the banks low liquidity status as destabilizing factors.

The economic development predicted over the next few quarters do not point towards economic instability. Economic growth of 3 percent is predicted for next year and the next two years show a strengthening of the economy. Már is concerned, however, that according to the newly published prediction of the Central Bank is that local demand will increase more dramatically than economic growth over the new few years. The national savings of Iceland will therefore decrease once again and the trade surplus will in turn become a trade deficit.